Asset Finance, Factoring & Invoice Discounting within the UK
Asset finance in its many various forms is now widely used within the UK and some forms of asset finance have grown rapidly over recent years. The term "asset finance" is used to describe a number of products but primarily invoice finance (otherwise know as factoring and invoice discounting), leasing and hire purchase.
The term "asset finance" refers to the fact that the level of finance is based on certain assets of the business rather than on it's financial strength, balance sheet and projections as is the case with more traditional forms of finance such as overdraft.
Invoice finance (factoring & invoice discounting) are short-term working capital solutions and products whilst hire purchase and leasing provide longer term fixed capital finance.
INVOICE FINANCE - FACTORING & INVOICE DISCOUNTING
Factoring and invoice discounting involve the client business assigning their sales invoices (also known as receivables or accounts receivable) to the finance provider (know as the factor or the invoice discounter - collectively referred to as the "factor" for ease of reference). The factor will provide their client with a prepayment (or early payment) against these invoices of a given percentage. The percentage that a factor will initially provide is normally up to 85% but this may vary according to the clients particular circumstances.
The balance of the invoice value is passed onto the client when the customer pays (less the factor's charges). With recourse factoring the factor will withdraw the prepayment if the debtor fails to pay the invoice after an agreed elapsed period of time however the factor may offer non recourse which includes a small additional charge for protecting the client against the risk of non payment by debtors. With non recourse, if the debtor fails to pay the invoice by an agreed date, the factor will credit the residual balance of the invoice (less the factor's charges) to their client.
The main difference between factoring and invoice discounting is that with factoring the factor takes over responsibility for collecting the outstanding sales ledger whilst with invoice discounting this function remains the responsibility of the client.
ASSET BASED FINANCE
Asset based finance is used to acquire assets such as stock, raw materials, plant and machinery. Asset based lending is often offered as part of a package in conjunction with an invoice financing facility. Where stock finance is provided it is normally a revolving facility secured against these assets. The revolving nature of the facility means that it can provide more flexibility than traditional forms of finance such as overdraft. In many cases, where there is an existing invoice financing facility, the factor will provide an additional level of funding which takes into consideration the value of the stock. The level of funding against such assets is normally lower than for invoice finance, typically up to 50% of the value of the asset to account for the greater amount of risk and effort required to convert the asset into cash in the event of the need to recover the finance.
For fixed assets, the finance may work in a similar way to a loan. In some cases the financier will take ownership of the assets and sell them back to the client on credit terms.
LEASING AND HIRE PURCHASE
A lease is a contract between a lessor (the finance company) and a lessee (the business seeking to raise finance). that gives the lessee use of a specific asset (often machinery, vehicles or equipment) for a duration in return for making rental payments to the lessor. The lessor retains ownership of the asset during the term of the lease. The lessee does not normally have the right to purchase the asset at the end of the duration of the lease.
Hire purchase is a rental agreement that allows the hirer (the business seeking to raise finance) to purchase the asset at the end of the rental period.
There are two main forms of leasing within the UK: the finance lease (the lessee pays the majority of the value of the lease over the period of the agreement and so has the ability to continue the lease of the asset for a nominal "peppercorn" rental) and the operating lease (at the end of the lease the lessor will recover the asset and may lease it out again).
THE ADVANTAGES AND DISADVANTAGES OF ASSET FINANCE
There are a number of advantages with this form of finance:
- Asset finance gives the finance provider more security (as they effectively own the asset and tend to have a great deal of expertise in realising the value of the assets which they finance) which results in an ability to offer greater flexibility in the level of finance that can be provided.
- These forms of finance may be suited to businesses that are new starts, small businesses or have a weak financial position as the finance is primarily linked to the value of the assets rather than financial position of the business.
- Providers often offer other value added services to their clients in addition to the core finance e.g. collections support with factoring, bad debt protection, maintenance for equipment with leasing or hire purchase.
- Asset finance can enable a business to raise finance from providers that are not their bankers. This can help avoid situations where all forms of finance are simultaneously withdrawn by a single provider.
The principle disadvantages of asset finance are:
- It is not available to all industry sectors e.g. invoice finance is not available to retail businesses or businesses that sell on cash terms.
- In some cases it can cost more than other forms of finance although businesses often trade this off against the benefit of having access to finance that they would not otherwise have been able to receive. Also some of the value added services e.g. credit control support (sales ledger collection) with factoring can result is cost savings which can outweigh the additional cost of the finance.
SUMMARY
The various forms of asset finance discussed above can offer a wide range of businesses alternatives to traditional forms of finance such as overdraft. Overdraft and loans can be inflexible and unavailable in many cases whilst asset finance allows the business to utilise the value of its underlying assets rather than just leveraging its historic financial performance. These forms of finance can also be available to small businesses and businesses that do not have historic strong financial performance or a strong balance sheet.
If you require more information about any aspect of asset finance please do not hesitate on of our advisers on:
Complete an: ONLINE QUOTATION SEARCH REQUEST
For further information about Factoring follow this link
For further information about Invoice Discounting follow this link
